NEF is the UK's leading think tank promoting social, economic and environmental justice. Our purpose is to bring about a Great Transition – to transform the economy so that it works for people and the planet.

The UK and most of the world's economies are increasingly unsustainable, unfair and unstable. It is not even making us any happier – many of the richest countries in the world do not have the highest wellbeing.

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Why the UK could benefit from Stakeholder Banks

What do Germany, France, Switzerland, Canada and the USA have in common? The answer - local stakeholder banks. Not just a small number of tiny ones as in the UK, but stakeholder banking sectors that account for a major part of each respective banking system.

The UK stands out among our industrial competitors because we have almost no local banking infrastructure. This is a major impediment to rebalancing the economy and ensuring vibrant local economies throughout the UK.

More than half of deposits in France are with co-operative banks. Germany has a three way split between co-operative banks, local savings banks and big commercial banks such as Deutsche Bank. In Canada credit unions do not just prove real competition to commercial banks, providing a full range of services, but they punch well above their weight in lending to SME’s and often serve locations that commercial banks ignore. The USA has a similarly heavyweight credit union sector as well as Community Development Finance Institutions (CDFIs) that successfully meet the needs of hard to reach communities.

These different forms of stakeholder banks share some vital common features.

First, they pursue a dual social and financial mission. They operate in a commercial and professional way, but profits are merely a means to an end. The ultimate objective is not to exceed a target return on equity. The ultimate objective is to serve their stakeholders; customers and the local economy.

Second, they have a mandate to serve a defined geographical area, and often are not permitted to operate outside that area. This ‘regional principle’ forces banks to really get to know their local markets. They cannot take the easy option to allocate capital to financial speculation or wealthier areas; they can only succeed if the local economy succeeds.

Germany’s Mittelstand companies are built upon the solid foundation of a local banking system. Meanwhile, our SME’s have to compete while standing on the quicksand of an overly centralised and homogenous banking oligopoly that since the financial crisis has withdrawn credit as quickly as it pumped it out beforehand.

Our new report today outlines the many benefits of a more diverse banking system, but addressing this gaping structural flaw in the UK’s banking system has barely begun. Encouraging new entrants is certainly worthwhile, but will not fill this gap fast enough or at sufficient scale. It is time for the government to seriously review how RBS could be used to create a network of local stakeholder banks.